NSW power retailers wary on pricing

NSW’s electricity retailers are hoping a crucial decision due this week from the state’s independent pricing regulator will pave the way for effective competition in the state and avoid the stalling in the market that is plaguing Queensland and has driven away new entrants.

The draft ruling, to be released on Tuesday by the NSW Independent Pricing and Regulatory Tribunal, will be critical to profits the three majors,
Origin Energy
,
EnergyAustralia
and
AGL
Energy can make from their customers in the state over the next three years.

The three-yearly review will also have a big impact on the ability of the second-tier retailers, who don’t have an incumbent customer base, to be able to win household accounts and compete.

“After the challenges of some of the decisions in last year’s ruling, we’re looking for some certainty and confidence in the industry going forward," said
James Myatt
, chief executive of
Australian Power & Gas
, which has about 100,000 customers in NSW.

“We’re looking too see that the government set a direction forward to see whether there is going to be competition or whether it’s going to wind it back. There’s a degree of apprehension in the industry just to see which way they’re going to go."

The ruling from IPART will determine the regulated electricity prices in the July 2013-16 period for the about 50 per cent of households that have not signed a contract with a retailer.

If set too low the regulated prices crimp competition as they leave little scope for retailers to poach ­customers through discounts. But higher regulated prices would attract criticism, after sharp rises in recent years due to heavy spending in networks, green schemes and the carbon price.

In any case, a sharp drop in spending on networks should mean milder price increases for the next years. Energy­Australia has estimated prices in NSW will rise by 0-4.5 per cent per over the next three years.

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Of particular concern to retailers will be the regulator’s decision on determining wholesale energy costs.

Queensland’s decision to switch to a totally market-based cost of purchasing power, instead of using the long-run marginal cost, has been blasted by industry, which says that system doesn’t reflect their true costs.

To retailers’ relief, IPART has signalled it will use a hybrid approach in NSW, with a 75 per cent weighting on the long-run marginal cost, and the rest on the market cost. The draft ruling will also reveal IPART’s new approach to calculating the cost of green schemes, after the ­regulator admitted that its earlier approach was flawed.

AGL and EnergyAustralia have called for a rise in the retail margin allowance from the 5.4 per cent set in the 2010 ruling. In its submission AGL argued that level is “too low considering the risks of operating in the most volatile commodity in the world."

The industry has so far been encouraged by statements from IPART chairman
Peter Boxall
, who has pointed to effective competition between retailers as the best way for customers to get products they value.

“Recent experience demonstrates that retail price regulation has not protected consumers from electricity price shocks," Dr Boxall said last year.

IPART’s final decision on the NSW prices is due in May.

In any case, as NSW moves towards greater competition in power supply, some small businesses will no longer be able to be on the regulated price. A reduction in the consumption threshold for a “small retailer customer" from 160 megawatt hours a year to 100 MWh a year will force some pubs, motels and large strata plans into the competitive market, according to Clayton Utz.